Technology has affected few sectors more than media. As disrupted old-media companies struggle, a handful of disruptive new-media stocks have delivered huge gains. And now another generation of media hopefuls are following in their footsteps. The best-known disrupters, Seek, REA Group and Carsales.com, used technology to innovate classified advertising markets and steal market share from print-media providers. Other media companies are using technology to innovate old and new media platforms.
Out-of-home advertising providers oOH! Media, APN Outdoor Group and QMS Media are turning outdoor billboards into digital ones and transforming their advertising category.
iSentia Group is using technology to monitor what is said about organisations in online and print media and help them use content-marketing (editorial with promotional purposes) strategies.
Vista Group International’s software is helping the global cinema industry better manage content and become more efficient.
Smaller media companies are rapidly emerging. The Initial Public Offerings market has been a strong source of new-media companies in the past 18 months, so much so that it resembles the late stages of a bull market. Backdoor listings, where listed shell companies buy private enterprises or their assets, are also attracting micro-cap media/tech stocks.
Asia-focused digital media group Migme has more than doubled this year. Recent backdoor listing Newzulu is using user-generated video and story content to create a news platform and syndicated stories worldwide. The Paris terrorist attacks again highlighted the growing use of user-generated content in mainstream media coverage.
Other new-media companies are targeting offshore markets. iProperty Group, trying to be the realestate.com.au of South East Asia, has produced stellar returns since listing in 1997, and attracted a takeover offer from REA Group this year.
Sister company iCarsAsia has a similar strategy in vehicle advertising and appears an obvious target for its shareholder, Carsales.com.au. LatAM Autos, a late 2014 IPO, is doing the same in Latin America. In fact, a growing number of new information providers are classified as technology rather than media stocks on ASX, such is the blurring between the two fields.
Most are too small and speculative for portfolio investors, and micro-cap IPOs and backdoor listings of new-media stocks, in particular, need to be approached with care.
Those seeking exposure to new-media companies should focus on more established, profitable players benefiting from significant tailwinds — companies that can gain as their media segment grows, or as they target new markets, rather than have to win market share from larger tech rivals. Companies need deep pockets to go head-to-head with Seek, REA Group or Carsales.com in Australia, such is their dominance.
Here are three new-media companies with interesting prospects. None are cheap: the market recognised their potential and valued them accordingly. But each has good long-term prospects and should be on the portfolio radars during bouts of market weakness.
1. iSentia Group
The media-monitoring group listed on ASX in June 2014 through a $284 million IPO at $2.04. It has soared to $4.66 after beating prospectus forecasts with its 2014-15 earnings result and providing guidance in line with market expectation. iSentia provides media monitoring, social-media monitoring and analysis, media management and analysis, contract management services around communication strategies, and media-release distribution.
It is the market leader in an attractive industry: as internet content proliferates and content marketing grows, companies will have to spend more to monitor what is said about them here and overseas, and understand how customers view them. Like all good software companies, iSentia has a scalable business model, can grow without massive investment, earns higher margins, and benefits from recurring revenue.
It is growing quickly in Asia and its acquisition of Content King this year was a smart move as organisations invest more in content marketing. However, iSentia’s valuation is becoming an obstacle. It is due for a pause or share-price pullback after strong recent gains.
The median price target of $3.97 from a consensus of five broking firms suggests iSentia is best bought on price weakness.
Chart 1: iSentia (ISD)
[1]Source: Yahoo!7 Finance
2. 3P Learning
3PL provides content of a different kind: educational software programs for school children. About 5 million children in more than 200 countries use its products, the best known of which is Mathletics. 3PL also distributes the popular Reading Eggs program and has developed Spellodrome and its latest release, IntoScience.
It listed on ASX through a $282 million IPO at $2.50 a share in July 2014. Unlike several other new-media or software IPOs, 3PL has struggled to trade above its issue price, despite beating prospectus forecasts. It trades at $2.14 after touching $1.80 in September. Some fund managers are concerned 3PL is having to discount its licence to gain traction in the United States, and recent acquisitions, where it is a minority shareholder, may have worried the market.
3PL was in high demand during it oversubscribed IPO. It has a large user base, a growing global footprint, recurring licence revenue, high margins and a capital-light business model – traits of exceptional companies.
Also, education software has high switching costs once schools and children get used to a product, and 3pL is a market leader in its field. Some of its clever animation is almost movie-like. The question, of course, is valuation. At $2.12, 3PL is on a forecast Price Earnings (PE) multiple of about 18 times 2015-16 earnings, broking estimates show. That is not excessive for a high-growth software company with good traction in the US. Macquarie Equities Research has a 12-month price target of $2.92.
Chart 2: 3P Learning (3PL)
[2]Source: Yahoo!7 Finance
3. QMS Media
Outdoor advertising companies are among the more interesting new-media stocks. oOHMedia! Group and APN Outdoor Group, two IPOs from late 2014, have soared since listing. oOH! has a one-year total shareholder return of 127%, and APN Outdoor has delivered 117%. Not bad in a struggling advertising market.
Out-of-home advertising continues to increase its share of the total advertising market. The industry enjoyed record growth in 2014, with net revenue up 10% year-on-year, Outdoor Media Association (OMA) data shows. Outdoor audiences have consistently increased over the past five years.
Population growth, traffic congestion and more outdoor signs along major roads and transport interchanges, and in airports and shopping centres, are creating opportunities. The move to digital signage has terrific potential, as advertisers can better tailor adverts to current conditions and as more advertising content, with higher margins, is rotated through the eye-catching and sometimes annoying (especially at sporting grounds) signs.
oOH! Media and APN Outdoor have good prospects, but look fully priced after stellar gains. A third player, QMS Media, raised $90 million through an IPO and listed on ASX in June 2015 at 65 cents. It trades at $1.25 – a handy gain in a flat sharemarket.
QMS was established in 2014 to roll up several outdoor advertising companies. It has a stronger focus in New Zealand and South East Asia than oOH! and APN Outdoor. The $200 million QMS is about half the size of oOH! Media by market capitalisation and a third the size of APN Outdoor, so it suits investors comfortable with small-cap stocks. QMS is growing quickly. It recently acquired iSite, one of New Zealand’s two largest outdoor advertising companies for $44.4 million. New Zealand is lagging behind Australia on digital outdoor advertising and there is potential to offer Trans-Tasman advertising packages.
Managing director Barclay Nettlefold has a strong following in this industry after developing several leading outdoor advertising businesses in Australia and across Asia over a long career. A strong board and management team, and backing by Qatar investors, has attracted plenty of attention for QMS and upped the stakes with its valuation for a company made a $2.6 million profit in 2014-15 after significant items.
QMS is so far delivering on its promise. The New Zealand acquisition gives it a strong foothold in that market and contract wins this year in Auckland and Indonesia are good signs.
The rollout of digital billboards is the key to QMS. Digital revenue, 24% of its Australian media revenue in FY15, has grown to more than 40% in the first half of FY16. QMS added 18 digital billboards in FY15 and is rapidly rolling out more. It appears to have made a good start to FY16, judging by commentary in its December presentation. Investors at this stage are betting on management to repeat its success with other outdoor advertising groups and are paying up for the potential.
QMS’ Asia Pacific and digital focus provide potential for rapid growth to take the valuation higher over the next two years – albeit with commensurate risk.
Chart 3: QMS Media (QMS)
[3]Source: Yahoo!7 Finance
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.